Third Point Draws on Sony’s Own Playbook in Spinoff Pitch

Billionaire Daniel Loeb argues Sony
Corp.’s best chance to realize value from its movie and music
businesses is to sell part of them. His plan draws inspiration
from the company itself.

Sony raised 320 billion yen ($3.1 billion) in 2007 when it
spun off its financial services unit in an initial public
offering. The banking and insurance business, majority owned by
Tokyo-based Sony, is the biggest contributor to the parent’s
earnings and, along with the entertainment unit, has helped it
weather nine straight years of losses in the TV business.

Loeb, whose Third Point hedge fund has acquired about 6.5
percent of Sony, personally delivered a letter to Chief
Executive Officer Kazuo Hirai in Tokyo this week pushing for an
IPO of as much as 20 percent of the entertainment assets. A
rights issue to support the sale would provide cash for the
Japanese company while also enabling it to put debt into the new
movie assets, the billionaire said.

“We think Third Point’s proposals offer Sony and its
shareholders the best of all possible worlds,” Christian Dinwoodie, an analyst at CLSA Asia-Pacific Markets who
recommends buying the stock, said in a report.

“Sony can maintain control of its entertainment business
and implement content driven strategies, improve its balance
sheet, unlock value for shareholders and increase its focus.”

The entertainment businesses aren’t for sale, Sony said in
a May 14 statement.

Apple, Samsung

Sony fell 1.6 percent to 2,036 yen as of 9:42 a.m. in
Tokyo. The stock, which surged 10 percent yesterday, has more
than doubled this year, increasing its market capitalization to
$20.2 billion. In 2000, Sony was worth more than $120 billion.

Financial services, which include insurance and online
lending, contributed 146 billion yen to Sony’s operating income
of 230 billion yen in the 12 months ended March, according to
data compiled by Bloomberg.

Music and movie production generated 85 billion yen of
profit, while the units that include TVs and smartphones lost a
combined 181 billion yen as consumers shifted toward products
from Apple Inc. and Samsung Electronics Co.

Xperia, Bravia

Those results for consumer electronics make Loeb’s proposal
a bad one for Sony as it struggles to come up with hit products,
said Amir Anvarzadeh, Singapore-based manager for Japanese
equity sales at BGC Partners Inc. (BGCP)

“Basically, you’re going to throw this company out to sea
to compete head on with the likes of Samsung,” Anvarzadeh said
by phone. “What happens to Sony in the aftermath of these
sharks coming in?”

Third Point said an IPO and rights issue would provide
capital for Sony to invest in consumer electronics while the
film and music businesses focus on improving profitability.
Hirai is counting on Xperia smartphones and Bravia TVs to
recapture market share lost to Apple and Samsung.

“The parent company would not only receive meaningful
liquidity to inject into Sony Electronics while maintaining
control of the spun-off entity (as it has done successfully in
the past with Sony Financial), but also should be able to push
down a meaningful but sustainable portion of its debt,” Loeb
wrote in the letter.

Sony entertainment’s lineup includes blockbuster movies
“Skyfall” and “The Amazing Spider-Man,” the TV show
“Breaking Bad” and music artists Adele and Bruce Springsteen.

Part ownership hasn’t been a hurdle for Sony to develop its
businesses in the past, according to Damian Thong, a Tokyo-based
analyst for Macquarie Group Ltd.

“It seems sensible and not actually very earth-shattering,” Thong wrote in a report. “Sony Music
Entertainment (Japan), Sony’s domestic music business, was after
all a listed company between 1991 and 2000.”